Strong unit revenue and cost control push up IAG profits

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British Airways and Iberia parent IAG cites improved unit revenues as a key factor for its improved third-quarter financial performance.

IAG lifted operating profits before exceptional for the three months ending September 2013 to €690 million ($930 million), compared with a €270 million profit at the same stage last year. The third-quarter figures this year were improved by €139 million profit from new group member Vueling, leaving operating profit before its inclusion at €551 million. The majority of these profits, €477 million, were contributed by British Airways and the remainder by Iberia.

"It has a lot to do with the passenger unit-revenues increase," said IAG chief financial officer Enrique Dupuy today during a third-quarter results conference call. He says passenger revenues on a like-for-like basis – that is, excluding Vueling and at constant currencies – were 7.4% higher in the third quarter than the same period last year. That figures slips to 6.7% when Vueling is included and to 1.2% when currency effects are accounted for.

Currency changes had a significant impact in the quarter. "It had a negative impact on revenues of €288 million and a benefit on costs of €246 million. So it had a negative impact of €42 million in the quarter.

Excluding Vueling and at constant currencies, IAG enjoyed a €323 million lift in profits. It estimates around half of this was delivered through improved passenger yields, more than offsetting the significantly reduced capacity at Iberia.

IAG's unit costs excluding fuel – without Vueling and at constant currencies – were fractionally higher in the third quarter but 9% down when adjusted to include Vueling and currency changes. Much of the improvement for the group on this side came from reduced employee costs. Dupuy says that the improvements at BA are driven by productivity measures, while at Iberia it is mostly around salary cuts. "In terms of productivity at Iberia we have a bit more to do in the fourth quarter and 2014," he says.

IAG is guiding for a full-year operating profit before exceptional items of €740 million. This compares with a loss of €23 million in 2012.

The group expects capacity in fourth quarter of this year to follow a similar pattern to the year to date. Iberia capacity will be 15% lower, Vueling up a quarter and British Airways – bolstered by new Asian routes and the entry into service of its Airbus A380s – will have 5% more capacity than in the fourth quarter of 2012. Dupuy notes most of this growth is in additional frequencies. "It is growing on existing and established routes, so it about a safe growth path," he says.

Total group capacity for the full year remains 5.2% higher – or reduced 2.4% when Vueling is excluded. IAG will provide more details of capacity plans for 2014, together with its longer-term targets, at a capital markets day on 15 November. But chief executive Willie Walsh confirms there will be no additional capacity at Iberia next year. "There will be modest growth at BA, flat at Iberia and good growth at Vueling," he says.

The group, which has put the focus on yield management this year, says moving into 2014 it expects the driver of revenue growth to shift from yield to volume due to new BA routes and Vueling's strong growth. "We can't stand still," explains Walsh. "We are not signalling a major change in direction. We are starting some new routes, which are of long-term strategic importance, particularly to BA.. But we are only adding capacity which we believe is right."